DSME 1030 Final Exam Sample

NAME: ID: SECTION:

Part I. Multiple Choice Questions. Choose the best answer and write it down
on the Table provided below. (37 marks)

ANSWERS:

1 21
2 22
3 23
4 24
5 25
6 26
7 27
8 28
9 29
10 30
11 31
12 32
13 33
14 34
15 35
16 36
17 37
18
19
20

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1. Industries where economies of scale exist will tend to be
A) served by a single seller or a few sellers. D) less concerned with expanding
output.
B) resistant to cutting price. E) perfectly competitive.
C) comprised of many equal sized firms.

2. Assume that a Coase Theorem solution (private negotiation) is impractical for solving
the externality problem illustrated. The efficient equilibrium could be achieved
by
A) banning production of the good.
B) compensating those injured by the externality.
C) taxing the good by an amount equal to the external cost.
D) subsidizing the good by an amount equal to the external benefit.
E) informing the public of the external cost produced by production of the good.

3. The reason economists consider monopoly socially undesirable is the monopolist

A) always earns excessive profits.
B) can charge any price he wants.
C) exploits the inelastic nature of demand.
D) produces less than the socially efficient amount.
E) can treat its consumers with complete indifference.

4. Price discrimination usually _____ consumer surplus and _____ producer surplus.
A) decreases; increases D) increases; increases
B) increases; decreases E) does not change; increase
C) decreases; decreases

5. Market equilibrium in a perfectly competitive market with no externality is considered

efficient because
A) prices are low.
B) the price consumers pay equals the profit producers receive.
C) no more trades remain that benefit some without harming others.
D) excess supply is positive.
E) excess demand is negative.

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6. Suppose you quit your job to start a business. In the first month, your total revenue
was $6,000. You paid the following costs:
1,000 in monthly rent for office space.
$ 200 in monthly rent for equipment.
$3,000 to your workers in wages for the month.
$1,000 for the supplies you used that month.

You determine that your true profit that month was negative $200. Why?
A) You did the math incorrectly.
B) You accounted for lost salary of $200.
C) You accounted for lost salary of $1000.
D) Your equipment rent is an implicit cost.
E) You inflate your costs to increase business deductions.

7. The existence of a negative externality will result in

A) economic efficiency if there is no government intervention in the market.
B) a greater than socially optimal level of production.
C) prices that are artificially high.
D) elimination of deadweight loss.
E) a less than socially optimal level of production.

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The following graph is also about a perfectly competitive market. Answer questions 8-12:

P r ic e
S + Tax
12
S

9 .2 0
8 .8 0
8 .2 0
5
D
4

0 7 8 Q u a n t it y

8. In the absence of a tax, the total economic surplus in the market is

A) $64. B) $40. C) $32. D) $16. E) $8.

9. Suppose a $1 per unit tax is imposed on sellers. The new equilibrium price is ______
and the new equilibrium quantity is ______.
A) $9.20; 7 B) $8.88; 8 C) $8.80; 7 D) $8.20; 7 E) $8.20; 8

10. Suppose a $1 per unit tax is imposed on sellers. The distribution of the tax burden
between consumers and producers is
A) 100% - 0%. B) 60% - 40%. C) 50% - 50%. D) 40% - 60%. E) 0% -
100%.

11. Suppose a $1 per unit tax is imposed on sellers. The total tax revenue raised is
A) $7. B) $5.60. C) $4.80. D) $2.80. E) $1.

12. The deadweight loss from imposing a $1 tax on sellers is

A) 50 cents. B) $1. C) $3. D) $4.50. E) $7.

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The following graph gives the marginal cost curve, demand curve, and marginal revenue
curve. Answer questions 13-19:

13. The distance representing the profit maximizing level of output to the monopolist is
A) 0H. B) GI. C) 0B. D) 0A. E) 0C.

14. The distance representing the profit maximizing price to the monopolist is
A) 0H. B) GI. C) 0B. D) 0A. E) 0C.

15. At the profit-maximizing level of output, the monopolist collects total revenues equal
to the area defined by
A) 0A. B) 0CEA. C) 0GIH. D) 0BKA. E) 0C.

16. At the point of monopoly profit maximization, consumer surplus is represented by the
area
A) CJE. B) GJI. C) BJEK. D) BCEK. E) GCEI.

17. A perfectly competitive equilibrium would have resulted in a price equal to the
distance __________ and a quantity equal to the distance __________.
A) 0B; 0A B) 0G; 0H C) 0C; BK D) 0J; CE E) 0G; AH

18. The socially optimal equilibrium would yield consumer surplus equal to the area
_______.
A) LEI B) GCEI C) 0GI D) GJI E) GCEL

19. The deadweight loss resulting from monopoly is represented by the area _______.
A) LEI. B) KLI. C) KEI. D) GCEL. E) BGLK.

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The following graph is about market demand and supply curves in a perfectly
competitive market. Answer questions 20-24:
P
$14

12

10 S

2
D

4 8 12 16 20 24 Q

20. If the market is unregulated, the value of consumer surplus is

A) $4. B) $8. C) $16. D) $24. E) $40.

21. If the market is unregulated, the value of the total economic surplus is
A) $20. B) $32. C) $48. D) $84. E) $124.

22. Suppose a price ceiling is imposed at $4. The value of the consumer surplus is
A) $16 B) $20. C) $24. D) $28. E) $32.

23. Suppose a price ceiling is imposed at $4. The value of the producers surplus is
A) $24. B) $16. C) $8. D) $4. E) $2.

24. The deadweight loss due to the $4 price ceiling is

A) $4. B) $8. C) $12. D) $16. E) $20.

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The following graph gives the demand curve, private marginal cost curve, and social
marginal cost curve. Answer questions 25-29:

P r ic e
S o c ia l M C
A
M C
B

D em and

0 E F U n its p e r d a y

25. This graph describes a production process that

A) generates positive externalities.
B) is used by a perfectly competitive industry.
C) generates negative externalities.
D) is highly regulated by the government.
E) has been negotiated using the Coase Theorem approach.

26. Compared to the socially optimal level, private market incentives (private market
outcome) would result in this good being _____ by_____.
A) overpriced; BD D) underpriced; BC
B) underpriced; BD E) efficiently priced; 0D
C) overpriced; BC

27. Compared to the socially optimal level, private market incentives (private market
outcome) would result in this good being _____ by_____
A) overproduced; EF D) underproduced; BC
B) underproduced; BD E) efficiently produed; 0E
E) efficiently produed; 0F
28. The deadweight loss associated with private incentives in this market is a triangle
with area equal to _______.
A) ½ 0D times 0E B) ½ 0C times 0E C) ½ EF times AC
D) ½ EF times AB E) ½ EF times BC

29. The social optimum in the market illustrated could be achieved by imposing a
_______ per unit.
A) subsidy equal to DB D) tax equal to BC
B) tax equal to DB E) tax equal to BA
C) subsidy equal to BC

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The graph on the left depicts market demand and supply curves in a perfectly competitive
market. The left graph shows the cost structure of a representative firm in the industry.
Answer questions 30-37: (Note: ATC stands for average total cost, MC marginal cost)

S
$ /L b $ /lb
1
5 S
5
S2 M C
P
4 4 ATC
3 3 P 1
2 .5
2 2 P 2

1 1
D

50 150 250 500 1500 2500 lb s /y r

1 0 0 0 ’s o f l b s / y r

30. If S is the short-run supply curve for a steak producer, what is the profit maximizing
output for a single firm in the short run?
A) 500 B) 1000 C) 1500 D) 2000 E) 2500

31. At the profit maximizing quantity for a single firm when S is the short-run supply
curve, price will ______ the total cost of the resources required to enter the
market, and firms will _____.
A) be less than; exit the market. D) be less than; enter the market
B) exceed; exit the market E) be same as; enter the market.
C) exceed; enter the market.

32. If S is the short-run supply curve for steak producer, what is the profit (loss) for this
firm?
A) $8000 B) $4000 C) $2000 D) $1500 E) $1000

33. Suppose S is the short-run industry supply curve and all firms are producing at the
profit-maximizing quantity. What will happen to the supply curve in the long run?
A) Quantity supplied will increase but stay on S curve
B) Supply will shift to S1
C) Quantity supplied will increased and will on S1 curve
D) Supply will shift to S2
E) Quantity supplied will decrease

34. What will be the ATC in the long-run equilibrium?

A) $4 B) $3 C) $2.5 D) $2 E) $1

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35. In the long run, equilibrium price is_____ and firms' profit maximizing quantity is
_______.
A) $4; 100,000 B) $3; 150,000 C) $3; 1,500 D) $2; 200,000 E) $2; 1000

36. What will be the long-run economic profit for this firm?
A) $4000 B) $2000 C) $1500 D) $1000 E) $0

37. If all of the firms in this industry are identical, how many firms will exist in the long-
run equilibrium?
A) 100 B) 200 C) 250 D) 300 E) not enough information to know

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Part II. Analytical Questions. Write down your answer on the Answer Booklet provided.
Please label your question number clearly. Answer ALL 4 questions. (63 marks)

1. Larry, Curly and Moe run the only saloon in town. Larry wants to sell as many
drinks as possible without losing money. Curly wants the saloon to bring in as
much revenue as possible. Moe wants to make the largest possible profits. Using a
single diagram of the saloon’s demand curve and its cost curve, show the price
and quantity combinations favored by each of the three partners. Explain. (12
marks)

2. Little Kona is a small coffee company that is considering entering a market

dominated by Big Brew. Each company’s profit depends on whether Little Kona
enters and whether Big Brew sets a high price or a low prices:

a. Does either player in this game have a dominant strategy? (4 marks)

b. Does your answer to part (a) help you figure out what the other player
should do? What is the Nash equilibrium? Is there only one? (4 marks)
c. Big Brew threatens Little Kona by saying, “If you enter, we’re going to set
a low price, so you had better say out.” Do you think Little Kona should
believe the threat? Why or why not? (4 marks)
d. If the two firms could collude and agree on how to split the total profits,
what outcome would they pick? (4 marks)

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3. Consider a monopolistically competitive market with N firms. Each firm’s
business opportunities are described by the following equations:

Demand: Q = 100/N – P
Marginal Revenue: MR = 100/N – 2Q
Total cost: TC = 50 + Q2
Marginal Cost: MC = 2Q

a. How does N, the number of firms in the market, affect each firm’s demand
curve? Why? (4 marks)
b. How many units does each firm produce? (The answers to this and the next
two questions depend on N) (4 marks)
c. What price does each firm change? (4 marks)
d. How much profit does each firm make? (4 marks)
e. In the long run, how many firms will exist in this market? (4 marks)

4. Many transportation systems, such as the Washington, D.C., Metro (subway),

charge higher fares during rush hours than during the rest of the day. Why might
they do this? (15 marks)

~The End~

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